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What can we learn from privately held firms about executive compensation?

Cole, Rebel and Mehran, Hamid (2010): What can we learn from privately held firms about executive compensation?

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Abstract

This study examines executive compensation using data from two nationally representative samples of privately held U.S. corporations conducted ten years apart—in 1993 and 2003—and uses these data to test a number of hypotheses. We find that: (i) the level of executive pay at privately held firms is higher at larger firms and varies widely by industry, consistent with stylized facts about executive pay at public companies; (ii) inflation-adjusted executive pay has fallen at privately held companies, in contrast with the widely documented run-up in executive pay at large public companies; (iii) the pay-size elasticity is much larger for privately held firms than for the publicly traded firms on which previous research has almost exclusively focused; (iv) executive pay is higher at more complex organizations; (v) organizational form affects taxation, which, in turn, affects executive pay, with executives at C-corporations being paid significantly more than executives at S-corporations; (vi) executive pay is inversely related to CEO ownership; (vii) executive pay is inversely related to financial risk; and (viii) executive pay is related to a number of CEO characteristics, including age, education and gender: executive pay has a quadratic relation with CEO age, a positive relation with educational, and is significantly lower for female executives.

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